Spotlight guidance on contractor loan schemes
HMRC has published a warning about the use of contractor loan schemes, following a ruling by the Advertising Standards Authority (ASA) about misleading advertising by a tax avoidance scheme promoter, Williams Gordon
14 Feb 2018
Spotlight 42 outlined that the Williams Gordon website claimed contractors could ‘take home up to 92% of your pay’ and that the scheme is ‘fully compliant with the necessary HMRC legislation and with all current IR35 policies’.
The ASA agreed with HMRC’s complaint and ruled that the claims made by Williams Gordon are misleading and must be withdrawn. It also ruled that the Williams Gordon website ‘misled by omission’ - by failing to mention the many government tools and policies aimed at the avoidance they were promoting.
This include the general anti-abuse rule and the loan charge on disguised remuneration loans outstanding on 5 April 2019.
The Williams Gordon website also fails to highlight that the contractor loan scheme offered is a form of tax avoidance which HMRC believes does not work.
HMRC says the scheme advertised is a known contractor loan scheme which pays contractors a small part of their salary as PAYE income, with the rest paid as a loan, on which it is claimed no income tax or National Insurance contributions (NICs) are due.
HMRC says its understanding is that contractors in this scheme are employed by an umbrella company which supplies the contractor’s services to their end-client.
The umbrella company invoices the end-client and retains 10% as a fee, while paying the contractor a salary at, or just above, the national living wage but below the limits for tax and NICs. The balance of the invoice is paid to the contractor in the form of a loan with terms that mean it is unlikely to ever be repaid.
HMRC says loans like this are no different to normal income and should be taxed in the same way as any other employment income.
HMRC advises that all users of the scheme will be subject to an enquiry and will be affected by the loan charge if they do not settle their affairs before 5 April 2019. As well as any extra tax due, penalties may also be chargeable.
The ASA ruling sets an example, so other avoidance promoters cannot make the same claims about similar schemes. Williams Gordon and other promoters of similar schemes must now remove these claims from their advertising or risk facing ASA sanctions.
Report by Pat Sweet